John Key MP - National Party Finance Spokesman

17 August 2005

Getting back on top of the OECD tables

Address to Auckland Branch of Financial Planners & Insurers Association, Langham Hotel, Symonds St, Auckland

Good afternoon.
You have posed the question “should we be in the top quartile of the OECD for economic wealth. The pathway to get there is ...."

Dealing with the first part of the question is easy.

Of course the pathway there is where Dr Cullen and myself part ways.

Labour thinks the pathway there is through more state control, bigger Government spending and more bureaucrats and advisers.

National thinks the pathway there is paved with personal responsibility, the right tax incentives, more freedom and choice, and smaller, more efficient government.

Should we be in the top quartile of the OECD? Of course we should, but I don’t think we should limit our potential to doing well in one abstract measurement tool.

But if we were to limit ourselves to one objective, then raising per capita incomes must be our top priority.

Real income levels are a pretty good proxy for a huge variety of factors likely to influence the overall appeal and success of this country.

Right now, New Zealand’s real income levels are barely moving.

Some people argue that Kiwis are unique in valuing the environment more than the economy, as if the two are some how incompatible. These folk go further and say that because as a nation we are blessed with picturesque mountains and clean beaches, that this is somehow a substitute for a decent standard of living and job satisfaction.

Such an assumption is quite incorrect.

Not that the environment isn’t critical. After all, our clean, green image is the fundamental foundation upon which our core export earners - tourism and agriculture - are based

But to make the implicit assumption that rising incomes are somehow incompatible with a clean environment, or that as a nation we are prepared to sacrifice a decent standard of living and job satisfaction just because we live in a pretty country is simply wrong.

The truth is we continue to suffer a significant brain drain, leading to an increasingly serious skills gap.

Of course there are a number of reasons why Kiwis travel. What should worry us is that more and more aren’t coming back, and when they do it’s on the understanding that they’ll be paid less.

You and I might wish this weren’t the case but the one million Kiwis who now no longer call New Zealand home are living proof. They have voted with their feet, and 600 more will vote with their feet and move to Australia this week.

So getting our income back into the top half, and indeed the top quarter, of the OECD matters a lot.

Wealthier countries can afford to spend more on their environment, they can afford to spend more on healthcare, they can afford to spend more on elder care, and they can afford to spend more on education.

Poor countries can’t.

Wealthier countries can afford first class energy and roading infrastructure, they can afford a strong justice system, and they can afford to provide better services for their communities.

The notion of us catching up, in per capita income terms, with the better performing industrialised countries is a useful shorthand way of providing a measurable target.

But let me warn you: to get New Zealand back into even the top half of the OECD won’t be easy.

If we assume that the OECD grows on average in real terms at 2% per year then we will need to grow consistently at 3% to make it in 20 years’ time.

Even if we grow at 4% it will take a decade.

Maintaining our growth rate and the important productivity rates that underpin it will take focus, determination and commitment.

Unfortunately there is no silver bullet, but there is a range of things we can do on a co-ordinated basis that will work.

It is this package of initiatives that forms the basis of National’s economic vision. It will form the basis of our work programme in the years ahead as the next government of New Zealand.

The first thing we will do is develop a tax system that not only raises the necessary revenue to fund government spending but also provides the right incentives for people to get ahead from their own efforts.

Our tax plan will reaffirm our view that tax is important and that tax is a significant driver in people’s willingness, desire and ability to work, to gain skills, to save and to take risks.

When New Zealanders face high marginal tax rates we shouldn’t be surprised that many will lose heart and won’t even bother to try.

Only last week an Australian newspaper reported on research undertaken by three economists at Australian National University.

The Federal Government said the budget tax cuts, which lowered the bottom tax rate from 17% to 15% and raised the two top tax-rate thresholds, would deliver $12-a-week to a typical two-income household.

Only a few more packets of chewing gum you say?

Well no, actually.

The economists noted that the boost to the average family's take-home income would in fact be as high as $60 a week. On top of that they say it would coax tens of thousands of people into the workforce.

They present evidence which suggests people are likely to respond to the tax cuts by working twice as many extra hours. Furthermore, it found women were twice as responsive to tax cuts as men, and low-income earners far more responsive than high-income earners.

What they found is that the tax cuts outlined in the Australian Budget are likely to enlarge Australia's pool of 10 million workers by almost 1% and lift total working hours by 1.7%.

I’ll repeat that because this is important - the tax cuts outlined in the Australian Budget are likely to enlarge Australia's pool of 10 million workers by almost 1% and lift total working hours by 1.7%.

More people working and more people producing more.
So tax really does matter, despite Dr Cullen’s ideological opposition.
For National, a commitment to ensuring New Zealand has a competitive tax burden that sends the right messages will be paramount in our plan.

The second plank in National’s strategy is education.
In particular, our focus will be on the one-in-five school leavers who currently come out of their compulsory school years with inadequate literacy and numeracy skills.

More will be done to strengthen non-performing schools, while top schools will be able to gain even greater independence - and even mentor those schools which fall behind.

This approach will allow a school to have much greater flexibility to grow and finance their development and make them more responsive to the community’s needs.

In the tertiary sector, low quality sub-degree and community courses will be replaced by better funding for trades, apprenticeships and courses that are relevant to a growing economy.

Welfare reform is also high on our ‘to do’ list.
We simply don’t believe that all 300,000 working age adults currently collecting a benefit cheque are unable to contribute to, or be engaged in, their community in some way.

National will have a stronger focus on mutual obligations through community work schemes and retraining, so that those currently trapped on welfare can harness skills that will allow them to get work.

If the 80s and 90s are remembered as a period where finance ministers were focused on debt reduction, my view is that the theme for the next 20 years will be infrastructure development.

Of primary importance will be transport, in particular roads and energy.
Our plan is three-fold. We don’t agree with Dr Cullen’s obsession to achieve a 20% gross debt to GDP target by 2015 - not that we are forecasting significantly higher levels of government debt.

The reality is that other indicators such as net debt and net worth are equally important.
Unlike Labour, National is not opposed to borrowing to fund smart investments in things like roads and power stations, where the asset pays for itself over its lifetime.

It’s a lot like the homebuyer who draws down a mortgage rather than paying for his property in one lump sum from their cheque account.

Over time, the house appreciates in value, and the borrower’s net worth increases.
It’s hard to understand why Dr Cullen refuses to accept the international evidence which supports a mix of borrowing and public-private partnerships for major infrastructure projects.

But finding the funding for our fraying infrastructure is only part of the problem
Unless we commit to tearing down the legislative roadblocks in the Building Act, the Land Transport Management Act and the RMA, the progress on our infrastructure will be slow. Even slower if there is a Greens/Labour Government on September 18.

National will urgently move to implement a number of key changes to the RMA in a bill that will be introduced to Parliament within three months of Don Brash becoming Prime Minister. We will pass it into law within nine months.

The changes include direct access to the environment court for major projects, elimination of vexatious claims, limitation of legal aid in relation to the RMA and the streamlining of consultation, in particular no special consultation rights for Maori groups.

You, as financial planners, understand more than most the role of capital markets in achieving a higher per-capita income.

I’m sure you’ll agree that as a general principle we should be looking to reduce the tax burden on capital formation and savings.

I support Craig’s proposal to eliminate capital gains tax on managed equity funds. Of course it naturally follows that I don’t support Labour’s introduction of a capital gains tax on grey list countries, including Australia.

I say that because:

1. There is no financial rationale on the government to introduce yet another tax.
2. This will only lead to less diversification for Kiwi investors and long term that can only be a bad thing. As we saw a few weeks back with the stunning result of the Super Fund, diversification is powerful and important when you have a small market.

3. This will only lead to New Zealanders exiting foreign share markets and replacing those investments with either offshore property investments or bringing the money back home.

4. And if the money does come home, then it is likely to end up in the commercial property market or the New Zealand Stock Exchange. Both scenarios are dangerous. Either property prices go up and first-home buyers are further disadvantaged, or foreign investors collect a windfall from over-cooked domestic share prices.

Labour is sending the wrong messages to those who are disciplined enough to save.
It’s sending the same mixed signals with its extravagant student loans’ package.
Labour is actually encouraging students to borrow the maximum and repay the minimum. If Labour was really serious about encouraging saving it would not be encouraging this debt culture

National absolutely agrees with the philosophy that Kiwis should save more.
But where we part ways with Labour is how we deliver the right environment for increased savings.
Labour supports compulsion through its proposed Kiwi saver account, although that is a scheme that fails to address the fundamental reason why a large number of Kiwis don’t save - they don’t earn enough and they are overtaxed!

Introducing a convenient savings vehicle without changes to after-tax income borders on an exercise in futility. And while it sounds like a wonderful gesture, it just won’t change savings habits.

I confidently predict that Kiwi Saver would leave us with thousands of dormant accounts subsidised by the government and going nowhere.

And that’s pretty much where the Home Buyers scheme is taking us too. Dr Cullen argues this was the gem, hidden underneath the ‘deep dark Budget secret’.

But anyone who has taken the time to look at the modelling can see it is woefully inadequate, with far too little and far too late.

But it pales into insignificance when compared with the desperate and irresponsible proposal to write-off interest on student loans.

In the not so distant past, Helen Clark said it was a Labour priority to return New Zealand to the top half of the OECD in a decade. Then she saw the numbers.

Slowing growth, a heady exchange rate, a rigid Labour market, and welfare policies that lock people into dependence.

National has an eye on long-term growth and productivity.

Alongside fair tax, welfare reform, education and changes in the regulatory environment, we advocate more flexible labour markets, a smaller, more efficient state sector, enhanced trade relationships, and a determination to reduce red tape and compliance costs.

We have mapped out a path back to the top of the OECD, and it starts with putting more money in workers’ pockets.

The next National government will be focused on achieving just that.

ENDS

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